Debt: Smart Financial Decision or Four Letter Word?
Debt can be a smart financial decision or a four letter word. It all comes down to learning to tell the difference between smart debt and not so smart debt.
Credit cards
Smart: Using credit cards to establish a credit history. Credit cards are the fastest and most effective method for establishing a credit history. Use them for everyday purchases like gas and groceries, and pay them off every month to avoid finance charges.
Not so smart: Using credit cards because you don’t have cash. If you are carrying a balance on your cards and are scrambling to make payments, you are misusing your credit cards. Cut them up until they are paid off. Then don’t spend money you don’t have.
Home Buying
Smart: Buying a home that fits your budget. Mortgage debt is considered “good” debt, since homeownership indicates fiscal responsibility and stability. In addition, mortgage interest payments are generally tax deductible.
Not so smart: Buying more home than you can afford. Just because a lender offers you a low monthly payment and approves a large loan amount doesn’t mean you can afford the house. If the loan is structured so that payments are low initially, but may rise in the future, you could be in for a nasty shock, especially when interest rates are rising. Be sure you run all possible future scenarios before signing on the dotted line. If it seems too good to be true, it probably is.
Retail Store Credit
Smart: Same-as-cash financing. Especially for large purchases like furniture or appliances, same-as-cash financing can be a good deal. It’s basically an installment plan that allows you to pay off the purchase in 60 or 90 days without paying interest. If you don’t pay off the balance by then, interest usually kicks in and you end up paying more overall for your purchase.
Not so smart: Opening store credit cards and overspending. Many stores offer purchase discounts if you open a credit card with them. If you open a store credit card everytime you make a purchase, you could be paying much more in the long run. First off, opening multiple new lines of credit can hurt your credit score. Secondly, if you find yourself pulling out those new credit cards every time you shop, carrying high balances, and only making minimum payments, you are on the way to debt of the four-letter-word variety.
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